As one of the largest UK stocks by market cap, British American Tobacco (LSE:BATS) commands attention. Yet over the past year, much of the attention hasn’t been positive. In fact, the share price is down 22% over that time, with it hitting 52-week lows earlier in October. So is this a dip worth buying?
Problems in the recent past
The ongoing war between Russia and Ukraine has put pressure on British American Tobacco to exit operations in Russia. This hasn’t been easy, but it has finally come to a deal to dispose of the division. Even though we don’t know the financial details, I can’t imagine this was a great deal given the forced nature of sale.
Further, it accounted for 2.7% of group revenue, so even though this isn’t a drastic negative, it’s enough to be a cause of concern for investors.
Another problem came just last week with UK Prime Minister Rishi Sunak announcing a rising age restriction on buying cigarettes. This means that anyone aged 14 years or younger will never buy a cigarette legally.
Naturally, this sent the share price lower. Not only was it a surprise announcement but the impact on revenue going forward could be significant.
Assessing current value
Close to 52-week lows, there do appear to be some signs that the stock is becoming undervalued.
The traditional metric to look at is the price-to-earnings ratio. As a benchmark, anything below 10 is what I feel is a low figure. Currently, British American Tobacco has a ratio of 6.81.
A key factor in why the stock could be a good dip-buying opportunity is that earnings are remaining strong. The half-year results showed growth in both revenue and profits versus H1 2022. Interestingly, revenue in the New Category division was up 26.6%. This is where vaping and non-traditional tobacco products are kept.
Value also comes from the dividend potential. With a dividend yield of 9.08%, it’s one of the highest-yielding options in the FTSE 100. Given the cash flow and debt levels, I struggle to see how the dividend per share would be materially under pressure to be cut in the coming year.
Bringing it all together
From my perspective, we have a business that’s profitable and maintaining a growth trajectory. I don’t feel the share price should be down to such an extent over the past year. The problems recorded seem more related to investor sentiment instead of a fundamental issue.
Even with the age restriction plans in the UK, it should be remembered that this might not become law. And if it does happen, the business has a large enough global presence with diversified revenues to ease the hit.
On that basis, I think investors should considering adding this stock to a portfolio, to hopefully benefit from both a rebound in the share price and income.
